How to Write an Income Statement Step-by-Step

An income statement, also known as a Profit & Loss (P&L) statement or Statement of Financial Performance, provides a clear picture of a company’s financial performance over a specific period, typically a quarter or a full fiscal year. This financial document demonstrates how a business generates revenue and incurs expenses, leading to its net profit or loss. It is used by business owners, investors, and creditors to assess profitability and operational efficiency.

Required Financial Data

Before creating an income statement, gather specific financial information from your accounting records. These records serve as the foundation for accurately reporting your business’s financial activities. Common accounting records include the general ledger, subsidiary ledgers, cash receipts, bank statements, invoices, and checks. Maintaining detailed and organized records is important for accurate financial reporting.

You will need comprehensive revenue data, which encompasses total sales revenue from all sources. This includes income from selling goods, providing services, and any other activities that generate cash inflows for your business. Sales invoices and cash receipts are key documents for collecting this information.

Cost of Goods Sold (COGS) data is also necessary, representing the direct costs associated with producing the goods or services your business sells. This includes expenses like raw materials, direct labor involved in production, and manufacturing overhead directly tied to the creation of the product. For a service business, COGS might include the direct costs of delivering that service.

Information on operating expenses is another crucial component. These are the costs incurred through normal business operations, not directly tied to production. Examples include salaries and wages for administrative and sales staff, rent for office or retail space, utility bills, depreciation on assets like equipment, marketing and advertising costs, and general administrative expenses such as office supplies or legal fees.

Additionally, you need data for non-operating income and expenses. These are revenues and costs not related to your core business activities. Examples include interest income earned on investments, interest expense paid on loans, or gains or losses from the sale of assets like old equipment or property.

Finally, you must gather income tax data. This involves information on the applicable federal, state, and local income taxes your business owes based on its taxable income. The federal corporate income tax rate is a flat 21%.

Standard Income Statement Structure

The income statement follows a specific, hierarchical structure, presenting financial information in a logical order to reveal a company’s profitability. The statement begins with Revenue, representing the total income generated from sales of goods or services. This is the starting point for understanding a business’s financial performance over the period.

Directly below revenue is the Cost of Goods Sold (COGS). This line item reflects the direct expenses linked to producing the goods sold or services rendered. Subtracting COGS from Revenue yields the Gross Profit, which indicates the profit a company makes from its core operations before considering other expenses.

Following Gross Profit, Operating Expenses are listed. These include various costs incurred in running the business, such as selling, general and administrative expenses, and research and development costs. Common examples are rent, salaries, utilities, and marketing expenses. These expenses are grouped to provide a clear view of the costs associated with daily operations.

Subtracting Operating Expenses from Gross Profit results in Operating Income, often referred to as Earnings Before Interest and Taxes (EBIT). This figure shows the profit generated from a company’s regular business activities, excluding financing costs and taxes.

Non-Operating Items are then included. This section accounts for income and expenses not directly tied to the main business operations, such as interest income earned on investments or interest expense paid on borrowed funds. Gains or losses from selling non-core assets are also reported here.

The statement then arrives at Income Before Tax (EBT). This amount represents all revenues less all expenses, except for income taxes.

Income Tax Expense is subtracted from Income Before Tax. This line item reflects the total income tax liability for the period.

The final figure on the income statement is Net Income, often called the “bottom line.” This is the profit remaining after all expenses, including taxes, have been deducted from total revenues.

Step-by-Step Calculation and Entry

Once you have gathered the necessary financial data and understand the income statement’s structure, you can begin the calculation and entry process. The initial step involves entering the total Revenue generated during the reporting period. Directly below this, input the Cost of Goods Sold (COGS) for the same period.

After entering these initial figures, calculate the Gross Profit by subtracting COGS from Revenue. This provides the first measure of profitability, showing the earnings from direct sales after accounting for production costs.

Next, aggregate and enter all Operating Expenses. This involves summing up various costs like salaries, rent, utilities, marketing, and depreciation. Each operating expense category should be clearly listed and totaled.

With the total operating expenses determined, calculate the Operating Income by subtracting these expenses from the Gross Profit. This reveals the profit generated solely from the business’s core operations before considering non-operating activities or taxes.

You then incorporate Non-Operating Items. This involves adding any non-operating income, such as interest earned on investments, and subtracting non-operating expenses, like interest paid on loans. Gains or losses from the sale of assets not central to the business are also included here.

The next calculation is Income Before Tax (EBT), derived by adding non-operating income to, and subtracting non-operating expenses from, the Operating Income.

To calculate and apply Income Tax Expense, multiply the Income Before Tax by the applicable federal and any state income tax rates. This calculated tax amount is then subtracted from the Income Before Tax.

The final step is determining Net Income. This “bottom line” figure is achieved by subtracting the Income Tax Expense from the Income Before Tax.

Reviewing and Interpreting the Statement

After completing the income statement, review it thoroughly for accuracy. Check calculations for mathematical errors and verify data transcription from accounting records. Reconciling figures with source documents like invoices and bank statements helps confirm precision.

Understanding the key figures provides insights into your business’s performance. Net Income indicates overall profitability; a positive figure signifies profit, while a negative figure indicates a loss.

Gross Profit reveals the profitability of your core sales activities. Operating Income demonstrates the profitability of your primary business operations, excluding financing and taxes. Analyzing these figures helps identify areas of strength or inefficiency.

The income statement covers a specific period, typically a quarter or a year. This provides a snapshot of performance over time, allowing for comparisons with previous periods or industry benchmarks. Regular review and interpretation of these statements can guide strategic business decisions.